Explain what can be done about the government contract

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Delish Pty Ltd (‘Delish') is a large private company which operates a family catering business across Western Australia and Northern Territory. Over the past 18 months, Delish's board of five directors (Mr and Mrs Turner, their daughter, their son and Richard Jones, a family friend) had discussed expanding their operations into Australia's southern and eastern states. To achieve this, the company needed to obtain finance (borrow money) from a bank to cover the costs of the expansion of the business and the necessary staff. However, at a board meeting in March 2015 the board decided (3-2 against) not to proceed with the expansion at that time, and to reconsider the matter next year. The daughter (Karen) and Jones were both very keen to expand the business and were very unhappy at the risk-averse decision of Mr and Mrs Turner and their son to block the plan. Karen took the business plan (for expansion) to a bank manager in Adelaide to see if a bank would be prepared to provide a loan. The bank manager was impressed with the business plan and told Karen that he would be prepared to recommend a loan to Delish to support the expansion. Excited, Karen convinced Jones to join her in co-signing both a loan agreement and a charge over all of Delish's assets and undertaking (business) to secure the loan of $7.5 million (these documents were signed in April 2015). Without the knowledge of the other three directors, Karen and Jones then arranged for the loan funds to be spent in setting up the company's new businesses in Adelaide and Melbourne. Unfortunately, just three months later most of the borrowed money had been spent but the businesses in Adelaide and Melbourne had been total failures.

At a board meeting in early August 2015, Karen and Jones finally told the other three directors what had happened. Yesterday the bank formally wrote to the company (a letter was sent to Delish's registered office in Darwin) seeking total repayment of the loan which was in default (repayments which fell due in June and JulyMarch and April 2015 were not paid and so the bank was contractually entitled to demand or ‘call up' the entire loan). If the loan is not repaid within two weeks, the bank will enforce its charge to recover the loan. The three directors who never approved of the expansion plans (nor the loan) have today co-signed a letter for and on behalf of the company to the bank, stating that Delish is not liable to repay the loan and that the charge is void because the company never approved of the transactions. The directors are all of the view that if Delish is liable to repay the bank loan, then the company is unable to meet all of its debts as and when they become due and payable.

Jones is not only a director but also a shareholder with 20,000 shares in Delish. The other 80,000 shares in Delish are owned by various people associated with the Turner family. Jones has just become aware that in April 2015 Mr Turner (Delish's Managing Director) convinced a long-standing client of Delish (a government department) to engage another caterer, Rapacity Caterers Pty Ltd (‘Rapacity') to provide catering for a large expo event. Jones understands that this large catering contract is worth almost $500,000. Mr Turner's close personal friend is the managing director of Rapacity and has recently had some hard times and difficulties with his business. Mr Turner wanted to do his friend a good turn and therefore told a ‘white lie' to the government client, saying that Delish was too busy to do the job but that Rapacity was an excellent alternative. (Rapacity did end up getting the contract.) Rapacity's managing director offered Mr Turner a 5% ‘kickback' payment for the referral but Mr Turner refused, saying that he just wanted to do a favour for a good friend and would not accept any personal gain.

(a) Is Delish bound by the loan agreement and charge which Karen and Jones have signed? If more information would be required to provide a complete answer, state what that information is and why it would be relevant. If Delish was liable to repay the loan, describe what the directors should do and how the bank could enforce its rights and interests.

(b) Explain what can be done about the government contract which Mr Turner referred to Rapacity. In your answer focus on who might be aggrieved by what has happened and just who has (or who might have) the legal right to do something about it.

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Reference no: EM13850095

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